Waging war on drug prices: One-molecule, one-price policy

As the government indicated trade margin rationalisation (TMR) on non-scheduled drugs to bring down prices of medicines by cutting margins earned by wholesalers, distributors and retailers, several small and medium pharma companies have suggested the government to adopt ‘one-molecule, one-price’ formula instead.

The difference between the price at which manufacturers sell products to stockists and the price at which they are sold to consumers is known as trade margin. The National Pharmaceutical Pricing Authority (NPPA) has fixed the rates of scheduled drugs whereas the prices of non-scheduled drugs are allowed to increase by as much as 10 percent a year.

Such a policy will ensure same price for all drugs that are made with similar chemical composition, irrespective of the brand manufacturing them. But the demand for this uniform formula has amplified due to a medical marvel.

At present, medicines with similar chemical compositions are sold at multiple prices by different pharmaceutical companies. For instance, a strip consisting 14 tablets of Atenolol Tablets 50 mg, which is manufactured by the FDC limited, is sold for Rs 8 (approximate value) whereas the drug with the same chemical composition manufactured by Nicholas Piramal India Limited is sold for around Rs 64.

Similarly, tablets like Zydus Cadilas diclofenac are sold under four names Activa, Diclofen, Inac and Jonac with price for a 10-tablet pack ranging from 19 paise to Rs 1.29

The Drug Price Control Order (DPCO) suggested a formula to decide the retail price of the drugs. This formula calculates material cost (MC), conversion cost (CC), cost of packaging material including the process loss (PM), packing charges (PC), maximum allowable post-manufacturing expenses (MAPE) and excise duty (ED) for the price at which consumers will buy drugs.

This means, retail price = (MC+CC+PM+PC)*(1+MAPE/100)+ ED

A massive variation in prices of drugs of different companies is caused because of changes the firms make in MAPE to increase drug prices, a senior industry official said. In several instances, companies have added to their research and development expenditure, product development and regulatory approval costs to raise the price of the drug.

The disparity of prices became evident when the pharma industry lost over Rs 2000 crore after the implementation of the new drug price control order (DPCO) that came into effect in July 2013. To stop the widening gap, DPCO sets the ceiling prices.

Moneycontrol.com, in an explainer, said, the pricing mechanism followed by DPCO is a market-based pricing mechanism. It means that the ceiling price of drugs is decided on the basis of simple average price of ‘all brands having at least one percent market share of the total market turnover of that drug plus a notional 16 percent retailer’s margin.’

This mechanism was implemented in 2013. Prior to it, DPCO used to follow a cost-based pricing mechanism that was based on costs put in for manufacturing medicine along with reasonable profit margins. Health experts argue that this mechanism offered lower prices than the current policy.

Besides the structural issue, an unhealthy alliance between doctors and pharma companies also results in the former prescribing medicines of the latter's brand to the patient.

Laghu Udyog Bharati, Federation of Pharma Entrepreneurs, Himachal Drug Manufacturers Association (HDMA), and the Indian Federation of Pharma Generics have urged the government to adopt this formula. They are also planning to raise this issue in an upcoming meeting with Union Minister for Health and Chemicals and Fertilizers Mansukh Mandaviya.

“We request the government to find out another way and apply a uniform formula (OMOP) for all segments,” said Rajesh Gupta, the all India head of the Laghu Udyog Bharati in an article for The Economic Times. He also added that TMR will benefit big companies to gain profits by selling their drugs at high prices. On the other hand, generic brands may wipe out due to their meagre margins in the next few years.

The proponents of the uniform formula believe that it would help in streamlining the margin of wholesalers and retailers. ET quoted a member of HDMA saying “This will avoid losses to the industry and confusion. Presently, the pharma sector is growing at 9 percent annually and to avoid any downward trend, it is important for the government to facilitate the pharma industry.”

Some industry experts also believe that it will disrupt the monopoly of big pharma entities.

Those against the implementation of OMOP argue that its implementation will not help pharma MSMEs as the brand value still remains with the larger pharma entities. Another argument is that it will increase the weighted average again, resulting in a price hike.

A report published in The Lancet in 2018 reported that 2.4 million Indians die from treatable conditions every year in India because of unaffordable medicines. It was considered to be the worst outcome among 136 nations that were assessed for the study.

A report by Azim Premji University titled ‘State of Working India 2021:One Year of Covid-19’ reported that from 2020 to 2021, the number of individuals below the national wage threshold, which is Rs 375 per day (as per the recommendations of Anoop Satpathy committee), has increased by 230 million. Even after this India’s health expenditure remains comparatively low.